An experimental bond-trading program being run at the Federal Reserve Bank of New York could fundamentally change the way the central bank sets interest rates.

Fed officials see the program, known as a "reverse repo" facility, as a potentially critical tool when they want to raise short-term rates in the future to fend off broader threats to the economy. Of particular concern for the Fed is finding a way to contain inflation once the trillions of dollars it has sent into the financial system get put to use as loans.

Like the plumbing beneath the floorboards in a home, this program is unseen by most investors and it isn't part of the Fed's current efforts to spur growth. Launched this year, it is still in a testing stage and isn't expected to be fully implemented for years.

Under this system, the Fed would raise short-term interest rates by borrowing in the future against its large and growing securities portfolio.

The Fed traditionally has managed short-term interest rates by shifting its benchmark federal-funds rate, an overnight intrabank rate. It did this by controlling how much money flowed into and out of the banking system on a daily basis. Small adjustments could significantly impact short-term rates. Since the Fed has pumped $2.5 trillion into the economy by purchasing bonds, the old system won't work unless the central bank pulls much of this money out. Instead, what Fed officials increasingly envision is a system in which it would tie up this money as needed by offering investors and banks interest on their funds.

The stakes are enormous. Right now banks aren't lending this money aggressively. But as the economy expands and lending picks up, the Fed will need to tie up the money to ensure it doesn't cause the economy or financial markets to overheat.

"The Federal Reserve has never tightened monetary policy, or even tried to maintain short-term interest rates significantly above zero, with such abundant amounts of liquidity in the financial system," according to a draft of a new research paper by Brian Sack, the former head of the New York Fed's markets group, and Joseph Gagnon, an economist at the Peterson Institute for International Economics and a former Fed economist.

Short-term rates—which serve as a benchmark for long-term rates for mortgages, car loans and other borrowing—are now near zero and the Fed doesn't plan to raise them for a couple of years. In normal times, the Fed cuts short-term rates to spur growth and raises them when it wants to slow growth.

When it does want to raise rates, the Fed under the repo program would use securities it accumulated through its bond-buying programs as collateral for loans from money-market mutual funds, banks, securities dealers, government-sponsored enterprises and others.

The rates it sets on these loans, in theory, could become a new benchmark for global credit markets.

The head of the New York Fed's markets group, Simon Potter, in a speech at New York University this month, described the new program as "a promising new technical advance."

Some market observers are going a step further and arguing that the Fed should abandon the fed-funds rate as its main lever for managing a broad spectrum of rates in the financial system.

Mr. Sack is among them. In his draft paper with Mr. Gagnon, they say the reverse-repo program should become a linchpin for the way the Fed manages interest rates in the future.

Mr. Sack, who is now co-director of global economics at the hedge fund D.E. Shaw, and Mr. Gagnon argue the Fed should discard its effort to target the fed-funds rate and instead use these repo trades as a primary way of guiding the borrowing rates that ripple through the economy.

The paper is notable because Mr. Sack, during his tenure at the New York Fed from 2009 to 2012, led the central bank's effort to find new ways to manage short-term interest rates.

Barclays analyst Joseph Abate said the repo program appears to have set a floor under short-term lending rates even during the small-scale tests. The general-collateral rate—the borrowing rate for the most common type of repo—has recently settled at about 0.10%, about 0.05% above the fixed rate the Fed has set for the repo facility and about 0.05% higher than it was earlier in the fall before the tests were launched.

Mr. Abate also said the Fed should abandon its fed funds target and stick with this program.

"The Fed has a very powerful tool on its hands," he said.

Without new tools like the repo facility, the Fed might not be able to control interest rates or it might be forced to take financially destabilizing steps such as selling the securities in its portfolio in a hurry.

The idea for the repo program bubbled up from the New York Fed's market group in part because another tool wasn't working well. Officials had seen a program known inside the Fed as IOER, for "interest on excess reserves," as the main avenue for managing short-term rates amid the flood of money in the system. Under this program, the Fed pays banks 0.25% for cash they keep at the central bank. In theory, when the Fed wants to raise short-term rates, it would raise this interest rate. Rather than lend out money, banks should want to keep it with the Fed.

In reality, the IOER program hasn't worked well, in part because some big market players including Fannie Mae and Freddie Mac can't participate. The fed funds rate has hovered well below the Fed's 0.25% floor for years. That isn't a problem now because the Fed wants to hold rates very low, but it raises concerns that the central bank won't have tight control of rates when the time comes to raise them.

The reverse-repo program extends the Fed's reach beyond traditional banks to Fannie, Freddie and others, and in theory should give the central bank more control over interest rates. Mr. Sack and Mr. Gagnon say the Fed should use the IOER program in conjunction with the reverse-repo program to set rates.

The Fed has been testing the repo program with 139 different counterparties in the past few months, including 94 money-market funds, and setting an interest rate of 0.05%.

"By reaching financial institutions that are ineligible to earn [interest on excess reserves]…the facility widens the universe of counterparties that should generally be unwilling to lend at rates below those rates available through the central bank," Mr. Potter said in his speech.

He was chief economist to Gerald Ford from 1974 to 1977, perhaps our most economically illiterate Republican President. Reagan chose him to head the Fed for the independent reputation he earned being a skeptic of Reaganomics. (Most Dems believe Reagan was senile by 1987.)

"It [Greenspan's new book] suffers in trying to appeal to two audiences. One audience is the professional economists. The book contains dozens of graphs and tables of regression analysis, together with t-statistics calculated with the appropriate Newey-West heteroskedasticity and autocorrelation consistent standard errors. (Don’t ask.) But Greenspan is also writing for lay readers who want to hear from this famous man about how the economy works. For their sake, most of those graphs and tables are put in an appendix, where they can be safely ignored. In trying to reach two audiences, the book does not quite reach either. Economists can learn a lot from it, but they will recognize that many of the arguments would have trouble passing scrutiny in peer-reviewed journals. "

...now you are being warned about the incredible boom in interest rates that is coming because the Fed is going to have to attempt, at some point, to manage these excess reserves once they start leaving the Fed.

How Much Does that Burger Cost in Bitcoins?The digital scrip doesn't meet the requirements to be a real currency.By Brian WesburyDec. 15, 2013 6:33 p.m. ET

In the 1930s, when the Federal Reserve let the money supply contract, there was a true shortage of currency. At least 150 communities experimented with scrip—printing their own money to grease the wheels of commerce. None worked, and all have disappeared.

Today, because of worries about the Fed printing too much money, a private online global scrip, called Bitcoin, has been created. This scrip is supposed to protect society from inflationary monetary policy.

Could Bitcoins become an alternative to the money or monies that exist across the globe? One of the biggest investors in Bitcoins thinks so. The Winklevoss twins, of Facebook FB +0.62% fame, think the market for Bitcoins could increase 100-fold to more than $400 billion. And a Costa Mesa, Calif., luxury car dealer is reportedly selling cars, including a Tesla S and a Lamborghini Gallardo, for Bitcoins.

Bitcoins are "mined" by running a computer algorithm, creating a digitized code. That code can then be used to complete online transactions. The algorithm makes it progressively harder to mine Bitcoins as the total number increases. Preset limits supposedly cap the maximum number of Bitcoins at 21 million, and right now there are roughly 12 million in existence. Rising hope of wider acceptance drove the price of a Bitcoin to more than $1,200 a few weeks ago. But when Baidu.com, BIDU -0.30% the Chinese web services company, said it would not accept the scrip, the price fell sharply and it currently trades near $900.

Bitcoins meet most of the criteria of money. They are a medium of exchange, a unit of account, a store of value and a standard of deferred payment. But what ultimately gives money value is that it is accepted by others in trade for something of value. And that is why scrip doesn't work.

Let's say a barber in a Wisconsin town accepts scrip for haircuts and uses it to eat at a local restaurant that buys its produce from a local farmer. As long as each of these businesses kept all their purchases in the community, all would be well. But why would a scissor manufacturer in Germany or China or even Chicago accept this scrip? The car dealer in California, for example, is not actually accepting Bitcoins for his vehicles—they first have to be converted to U.S. dollars.

To become a true alternative currency, Bitcoins need to be accepted in a wide enough swath of society to facilitate the normal transaction of business. If they aren't, they will always trade at a discount to their potential value.

Right now, total cash and deposits in the U.S. banking system (the M2 money supply), is roughly $11 trillion. Assuming 21 million Bitcoins are mined and they become an accepted currency, each one could be worth as much as $524,000. This is a massive potential appreciation from their current level.

However, the list of companies that accept Bitcoin as payment for actual transactions make up what I estimate to be less than one-hundredth of a percent of all spending, or GDP. Since money gets its value from the goods, services and assets that it can purchase, a Bitcoin is currently worth only 0.01% of its true potential, or about $52.40.

Bitcoins require storage space (in a computer), power to run the computer (electricity), security (from hacking), and computational power (serious encryption) on both sides of a transaction. There are firms that act as middlemen in Bitcoin transactions, and firms that make a market in Bitcoins, but they are new and have no serious financial track record. Many Bitcoin transactions facilitate illegal commerce. The Bitcoin world is not friction-free, or clean.

And is it really true that no more than 21 million Bitcoins can be produced? Hackers keep getting better, and the temptation to expand the supply of money has been powerful (and profitable, for the issuer) since the time of the Romans. These costs and questions all impact the value of a Bitcoin substantially.

To become a real alternative currency, Bitcoins must be recognized by a majority of businesses and consumers. They must be as safe, or safer, than currency issued by a central bank. And they must be transportable. Currently, the Bitcoin does not meet any of these requirements, and this is why it is trading for much less than its actual convertible U.S. dollar value.

If you believe Bitcoin in time will become an alternative to the world's currencies, there are huge potential profits as the value of a Bitcoin rises to $524,000—or higher if drug dealers and other nefarious users are willing to pay a premium for anonymity.

But to be truly successful, Bitcoins have to win the battle of money on all levels of competition and that is a very high hurdle to clear.

Mr. Wesbury is chief economist at First Trust Advisors LP.

================================

Tricky Dog, who is a very bright fellow and has been following bitcoin comments:

Marc - he makes a few salient points but he is vague on the prospects or the details. Moreover, he does not seem to understand BitCoin (asking if only 21 million can be produced - it is an algorithm, not a choice). And it was not "created" due to any concerns about the Fed printing too much money. It was created to eliminate central authorities all together.

During 2013, America continued to steadily march down a self-destructive path toward oblivion. As a society, our debt levels are completely and totally out of control. Our financial system has been transformed into the largest casino on the entire planet and our big banks are behaving even more recklessly than they did just before the last financial crisis. We continue to see thousands of businesses and millions of jobs get shipped out of the United States, and the middle class is being absolutely eviscerated. Due to the lack of decent jobs, poverty is absolutely exploding. Government dependence is at an all-time high and crime is rising. Evidence of social and moral decay is seemingly everywhere, and our government appears to be going insane. If we are going to have any hope of solving these problems, the American people need to take a long, hard look in the mirror and finally admit how bad things have actually become. If we all just blindly have faith that "everything is going to be okay", the consequences of decades of incredibly foolish decisions are going to absolutely blindside us and we will be absolutely devastated by the great crisis that is rapidly approaching. The United States is in a massive amount of trouble, and it is time that we all started facing the truth. The following are 83 numbers from 2013 that are almost too crazy to believe...

#1 Most people that hear this statistic do not believe that it is actually true, but right now an all-time record 102 million working age Americans do not have a job. That number has risen by about 27 million since the year 2000.

#2 Because of the lack of jobs, poverty is spreading like wildfire in the United States. According to the most recent numbers from the U.S. Census Bureau, an all-time record 49.2 percent of all Americans are receiving benefits from at least one government program each month.

#3 As society breaks down, the government feels a greater need than ever before to watch, monitor and track the population. For example, every single day the NSA intercepts and permanently stores close to 2 billion emails and phone calls in addition to a whole host of other data.

#4 The Bank for International Settlements says that total public and private debt levels around the globe are now 30 percent higher than they were back during the financial crisis of 2008.

#5 According to a recent World Bank report, private domestic debt in China has grown from 9 trillion dollars in 2008 to 23 trillion dollars today.

#6 In 1985, there were more than 18,000 banks in the United States. Today, there are only 6,891 left.

#7 The six largest banks in the United States (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) have collectively gotten 37 percent larger over the past five years.

#8 The U.S. banking system has 14.4 trillion dollars in total assets. The six largest banks now account for 67 percent of those assets and all of the other banks account for only 33 percent of those assets.

#9 JPMorgan Chase is roughly the size of the entire British economy.

#10 The five largest banks now account for 42 percent of all loans in the United States.

#11 Right now, four of the "too big to fail" banks each have total exposure to derivatives that is well in excess of 40 trillion dollars.

#12 The total exposure that Goldman Sachs has to derivatives contracts is more than 381 times greater than their total assets.

#13 According to the Bank for International Settlements, the global financial system has a total of 441 trillion dollars worth of exposure to interest rate derivatives.

#14 Through the end of November, approximately 365,000 Americans had signed up for Obamacare but approximately 4 million Americans had already lost their current health insurance policies because of Obamacare.

#15 It is being projected that up to 100 million more Americans could have their health insurance policies canceled by the time Obamacare is fully rolled out.

#16 At this point, 82.4 million Americans live in a home where at least one person is enrolled in the Medicaid program.

#17 It is has been estimated that Obamacare will add 21 million more Americans to the Medicaid rolls.

#18 It is being projected that health insurance premiums for healthy 30-year-old men will rise by an average of 260 percent under Obamacare.

#19 One couple down in Texas received a letter from their health insurance company that informed them that they were being hit with a 539 percent rate increase because of Obamacare.

#20 Back in 1999, 64.1 percent of all Americans were covered by employment-based health insurance. Today, only 54.9 percent of all Americans are covered by employment-based health insurance.

#21 The U.S. government has spent an astounding 3.7 trillion dollars on welfare programs over the past five years.

#22 Incredibly, 74 percent of all the wealth in the United States is owned by the wealthiest 10 percent of all Americans.

#23 According to Consumer Reports, the number of children in the United States taking antipsychotic drugs has nearly tripled over the past 15 years.

#24 The marriage rate in the United States has fallen to an all-time low. Right now it is sitting at a yearly rate of just 6.8 marriages per 1000 people.

#25 According to a shocking new study, the average American that turned 65 this year will receive $327,500 more in federal benefits than they paid in taxes over the course of their lifetimes.

#26 In just one week in December, a combined total of more than 2000 new cold temperature and snowfall records were set in the United States.

#27 According to the U.S. Census Bureau, median household income in the United States has fallen for five years in a row.

#28 The rate of homeownership in the United States has fallen for eight years in a row.

#29 Only 47 percent of all adults in America have a full-time job at this point.

#30 The unemployment rate in the eurozone recently hit a new all-time high of 12.2 percent.

#31 If you assume that the labor force participation rate in the U.S. is at the long-term average, the unemployment rate in the United States would actually be 11.5 percent instead of 7 percent.

#32 In November 2000, 64.3 percent of all working age Americans had a job. When Barack Obama first entered the White House, 60.6 percent of all working age Americans had a job. Today, only 58.6 percent of all working age Americans have a job.

#33 There are 1,148,000 fewer Americans working today than there was in November 2006. Meanwhile, our population has grown by more than 16 million people during that time frame.

#34 Only 19 percent of all Americans believe that the job market is better than it was a year ago.

#35 Just 14 percent of all Americans believe that the stock market will rise next year.

#36 According to CNBC, Pinterest is currently valued at more than 3 billion dollars even though it has never earned a profit.

#37 Twitter is a seven-year-old company that has never made a profit. It actually lost 64.6 million dollars last quarter. But according to the financial markets it is currently worth about 22 billion dollars.

#38 Right now, Facebook is trading at a valuation that is equivalent to approximately 100 years of earnings, and it is currently supposedly worth about 115 billion dollars.

#39 Total consumer credit has risen by a whopping 22 percent over the past three years.

#40 Student loans are up by an astounding 61 percent over the past three years.

#41 At this moment, there are 6 million Americans in the 16 to 24-year-old age group that are neither in school or working.

#42 The "inactivity rate" for men in their prime working years (25 to 54) has just hit a brand new all-time record high.

#43 It is hard to believe, but in America today one out of every ten jobs is now filled by a temp agency.

#44 Middle-wage jobs accounted for 60 percent of the jobs lost during the last recession, but they have accounted for only 22 percent of the jobs created since then.

#45 According to the Social Security Administration, 40 percent of all U.S. workers make less than $20,000 a year.

#46 Approximately one out of every four part-time workers in America is living below the poverty line.

#47 After accounting for inflation, 40 percent of all U.S. workers are making less than what a full-time minimum wage worker made back in 1968.

#48 When Barack Obama took office, the average duration of unemployment in this country was 19.8 weeks. Today, it is 37.2 weeks.

#49 Investors pulled an astounding 72 billion dollars out of bond mutual funds in 2013. It was the worst year for bond funds ever.

#50 Small business is rapidly dying in America. At this point, only about 7 percent of all non-farm workers in the United States are self-employed. That is an all-time record low.

#51 The six heirs of Wal-Mart founder Sam Walton have as much wealth as the bottom one-third of all Americans combined.

#52 Once January 1st hits, it will officially be illegal to manufacture or import traditional incandescent light bulbs in the United States. It is being projected that millions of Americans will attempt to stock up on the old light bulbs before they are totally gone from store shelves.

#53 The Japanese government has estimated that approximately 300 tons of highly radioactive water is being released into the Pacific Ocean from the destroyed Fukushima nuclear facility every single day.

#54 Back in 1967, the U.S. military had more than 31,000 strategic nuclear warheads. That number is already being cut down to 1,550, and now Barack Obama wants to reduce it to only about 1,000.

#55 As you read this, 60 percent of all children in Detroit are living in poverty and there are approximately 78,000 abandoned homes in the city.

#56 Wal-Mart recently opened up two new stores in Washington D.C., and more than 23,000 people applied for just 600 positions. That means that only about 2.6 percent of the applicants were ultimately hired. In comparison, Harvard offers admission to 6.1 percent of their applicants.

#57 At this point, almost half of all public school students in America come from low income homes.

#58 Tragically, there are 1.2 million students that attend public schools in the United States that are homeless. That number has risen by 72 percent since the start of the last recession.

#59 According to a Gallup poll that was recently released, 20.0 percent of all Americans did not have enough money to buy food that they or their families needed at some point over the past year. That is just under the all-time record of 20.4 percent that was set back in November 2008.

#60 The number of Americans on food stamps has grown from 17 million in the year 2000 to more than 47 million today.

#61 Right now, one out of every five households in the United States is on food stamps.

#62 The U.S. economy loses approximately 9,000 jobs for every 1 billion dollars of goods that are imported from overseas.

#63 Back in 1950, more than 80 percent of all men in the United States had jobs. Today, less than 65 percent of all men in the United States have jobs.

#64 According to one survey, approximately 75 percent of all American women do not have any interest in dating unemployed men.

#65 China exports 4 billion pounds of food to the United States every year.

#66 Overall, the United States has run a trade deficit of more than 8 trillion dollars with the rest of the world since 1975.

#67 The number of Americans on Social Security Disability now exceeds the entire population of Greece, and the number of Americans on food stamps now exceeds the entire population of Spain.

#68 It is being projected that the number of Americans on Social Security will rise from 57 million today to more than 100 million in 25 years.

#69 Back in 1970, the total amount of debt in the United States (government debt + business debt + consumer debt, etc.) was less than 2 trillion dollars. Today it is over 56 trillion dollars.

#70 Back on September 30th, 2012 our national debt was sitting at a total of 16.1 trillion dollars. Today, it is up to 17.2 trillion dollars.

#71 The U.S. government "rolled over" more than 7.5 trillion dollars of existing debt in fiscal 2013.

#72 If the U.S. national debt was reduced to a stack of one dollar bills it would circle the earth at the equator 45 times.

#73 When Barack Obama was first elected, the U.S. debt to GDP ratio was under 70 percent. Today, it is up to 101 percent.

#74 The U.S. national debt is on pace to more than double during the eight years of the Obama administration. In other words, under Barack Obama the U.S. government will accumulate more debt than it did under all of the other presidents in U.S. history combined.

#75 The federal government is borrowing (stealing) roughly 100 million dollars from our children and our grandchildren every single hour of every single day.

#76 At this point, the U.S. already has more government debt per capita than Greece, Portugal, Italy, Ireland or Spain.

#77 Japan now has a debt to GDP ratio of more than 211 percent.

#78 As of December 5th, 83 volcanic eruptions had been recorded around the planet so far this year. That is a new all-time record high.

#79 53 percent of all Americans do not have a 3 day supply of nonperishable food and water in their homes.

#80 Violent crime in the United States was up 15 percent last year.

#81 According to a very surprising survey that was recently conducted, 68 percent of all Americans believe that the country is currently on the wrong track.

#82 Back in 1972, 46 percent of all Americans believed that "most people can be trusted". Today, only 32 percent of all Americans believe that "most people can be trusted".

#83 According to a recent Pew Research survey, only 19 percent of all Americans trust the government. Back in 1958, 73 percent of all Americans trusted the government.

So do you have any numbers from 2013 that you would add to this list? If so, please feel free to share them by posting a comment below...

Inflation is slowing across the developed world despite ultralow interest rates and unprecedented money-printing campaigns, posing a dilemma for the Federal Reserve and other major central banks as they plot their next policy moves.

U.S. consumer prices rose just 1.2% in November from a year earlier, according to Labor Department data released Tuesday. The subdued price data came as the Fed opened a two-day policy meeting at which the fate of its $85 billion-a-month bond-buying program—an effort to hold down long-term interest rates and drive up the value of homes, stocks and other assets—is a central focus.

Meanwhile, annual inflation in the euro zone was 0.9% in November, the European Union's statistics office said Tuesday. And central banks in Sweden and Hungary cut interest rates, the latest efforts elsewhere in Europe to boost struggling economies as inflation remains low.

The downward pressure on prices presents a conundrum for policy makers across advanced economies: Should they respond with even easier monetary policy or dismiss it as a temporary development?

Central bankers worry about inflation falling too low because it raises the risk of deflation, or generally falling prices, a phenomenon that is difficult to combat through monetary policy. Some economists believe weak or falling prices can lead consumers to delay major purchases, exacerbating an economic slowdown. Even without deflation, very low inflation can be a sign of weak demand that weighs on wages, corporate profits and growth.

"We're in a world where there's still a tremendous amount of economic slack," said Joseph Lupton, a global economist at J.P. Morgan Chase. "A return to growth is not a return to health. There's a long way to go here, which is why central banks in places like the U.S., U.K. and Japan are trying to get inflation up."

Inflation in both advanced and emerging economies picked up in the early stages of the economic recovery, eventually straddling central banks' inflation targets closely enough that many policy makers were charting an exit from their extraordinary monetary policies. But persistently weak demand in recent years has pushed inflation back into uncomfortably subdued territory.View Graphics

While policy makers have fretted about low inflation for years, their actions to combat it have yielded generally disappointing results. In the U.S., the Fed is wrapping up a fifth year of near-zero interest rates while also carrying out trillions of dollars of bond purchases in an effort to spark stronger hiring and investment. Employers are starting to add jobs at a steady pace, though overall economic growth remains modest.

But U.S. inflation has been below the Fed's 2% target for much of the past two years. The central bank's preferred gauge, the price index for personal consumption expenditures, increased just 0.7% in October from a year prior, according to a Commerce Department data released earlier this month.

Fed officials have forecast consistently that inflation would pick up, but that hasn't happened. Whether the Fed announces a pullback in its bond-buying program Wednesday or in coming months, it is expected to acknowledge its concerns about low inflation. That could reinforce expectations that the central bank will keep short-term interest rates near zero for years to come—as investors now widely expect.

The situation in Europe is perhaps more fraught. European Central Bank President Mario Draghi has said the euro currency bloc may see a "prolonged" period of low inflation. ECB forecasts support that view, with inflation averaging just 1.3% in 2015, well below its target of just under 2%.

Mr. Draghi says Europe doesn't face a slide into deflation like the one that plagued the Japanese economy for much of the past two decades. The ECB loosened its monetary policy more decisively than Japan did in the 1990s, he said earlier this month, and it is acting more swiftly to resolve problems with its banks. The ECB last month cut a key interest rate to 0.25% as it highlighted concerns about low inflation.

But the latest consumer-price figures mask deep divisions across the 17-member currency bloc. In healthy economies such as Germany and Austria where unemployment is low, inflation is around 1.5%. But in stressed countries along the bloc's southern periphery, consumer prices are stagnant or falling. Annual inflation was 0.7% in Italy last month and just 0.3% in Spain. The disparity makes combating low inflation broadly across the currency union difficult.

Deflationary forces deepened in recession-ravaged Greece, according to the Eurostat figures, with consumer prices down 2.9% in November from the previous year. Despite a banner year for Greek tourism, which saw visitor arrivals jump double digits to more than 17 million this year, the country's two main carriers, Aegean Air and Olympic Air, are struggling. Both carriers have offered steep discounts to fill vacant seats and their situation is so dire that, in October, the European Commission allowed the two airlines to merge—reversing its earlier ban—so as to save one or both from bankruptcy.

High inflation had been a major headache for the Bank of England in recent years, setting the U.K. apart from many other advanced economies. But inflation weakened in November to its slowest pace in four years, with prices rising just 2.1% during the month from a year earlier. That was just a hair above the Bank of England's 2% target.

Further evidence of subdued inflation was evident in U.K. wholesale prices Tuesday. Prices charged by companies at the factory gate rose 0.8% on the year in November, while raw-material costs fell by 1%.

Inflation's retreat is likely to reinforce the BOE officials' commitment to keep their benchmark interest rate at a historic low of 0.5% to underpin an accelerating U.K. economic recovery. The inflation slowdown puts the BOE "in a more comfortable position as it suggests that as growth picks up it is less likely to be concerned that inflation pressures will build up in the economy," said Blerina Uruci, an economist at Barclays.

Some developing economies, meanwhile, saw inflation accelerate enough that they were worrying about soaring prices. That changed over the past two years as demand slowed.

The slowdown in global prices has helped Brazil fight domestic inflation that peaked in June at a 6.7% annual rate and has since fallen to 5.8%, still above the central bank's 4.5% target. The country's central bank has increased interest rates by 2.5 percentage points, to 10%.

In China, the world's second-largest economy, inflation as measured by consumer prices has fallen to below 3.5% this year from 8% five years ago. Some economists say years of state-directed overinvestment in factories and a buildup of excess capacity could push prices even lower.

While China's low-cost manufacturing helped keep prices of consumer goods down in Western nations in recent years, the huge source of supply today risks exacerbating deflation worries in industrialized countries, some economists say. Excess capacity in key industries such as steel, glass and construction equipment has dragged prices down in some sectors.

China's growth slowdown also has reduced its demand for imports of items such as iron ore, copper and coal, pushing down prices in a range of global commodity markets.

"For a lot of industrial commodities—especially metals—Chinese demand is the factor that causes prices to rise or fall," said Mark Williams, an economist at Capital Economics, a London-based research firm.

Pep Boys, a Philadelphia-based supplier of tires and auto parts, blamed its disappointing financial results last week partly on weaker sales of lower-priced tires. That was "a result of competitive pressures from Asian imported tires," Pep Boys CEO Michael Odell said. He warned that the "pricing pressure could persist."

—David Roman in Madrid and Richard Silk in Beijing, Paulo Trevisani in Brasilia and Alkman Granitsas in Athens contributed to this article.

SHANGHAI—Prices of virtual currency bitcoin fell 20% Wednesday and are now down more than 50% from their record high hit two weeks ago amid worries that China is moving to block the purchase and use of the currency by its citizens.

China has emerged as a big driver of the bitcoin market in recent months as enthusiasm for the currency helped send prices soaring more than tenfold in the fall. In recent weeks, prices have tumbled after China's central bank issued a warning about the risks of bitcoin and said financial institutions shouldn't do business with bitcoin-related companies.

On Wednesday, the world's largest bitcoin exchange stopped allowing customers to use yuan to buy bitcoin. Shanghai-based BTC China "has no choice but to stop accepting yuan deposits," the exchange said in a post on Weibo, China's Twitter-like microblogging website.

"Bitcoin deposits, bitcoin withdrawals and yuan withdrawals will not be affected," it added. The exchange said it "will try to provide another method for deposits" but didn't elaborate. The move means a big source of new cash driving up prices of bitcoin has been eliminated. Exchanges are an important component of bitcoin's ecosystem. Coins can be bought and exchanged privately but most retail investors use the exchanges.

"My understanding" is that the People's Bank of China told third-party payment companies on Monday they can't work any longer with exchanges, BTC China CEO Bobby Lee said on Wednesday. These payment companies are often used for e-commerce in China and are the easiest way for individuals to transfer money from their bank accounts for web purchases.

While the central bank hasn't released an official statement, a person familiar with the matter said that a meeting between the bank and several third-party payment providers took place on Monday. The person said officials suggested that third-party payment providers cease their bitcoin involvement by the end of January though no official date was set.

The person added that the central bank sees its latest stance toward third-party payment providers as a reiteration of an earlier statement that neither financial institutions nor payment institutions partake in bitcoin-related businesses. The growing popularity of bitcoin is a threat to China's strict capital controls because it allows citizens to trade yuan for bitcoin and then sell the bitcoin overseas for foreign currency.

BTC China learned about the PBOC's latest stance from third-party payment platforms only and not the PBOC, added Mr. Lee. On Sunday, TenPay, the third-party payment unit of Chinese Internet giant Tencent Holdings Ltd. TCEHY -2.39% , stopped working with BTC. The exchange switched to Yeepay, another provider, but hasn't stopped working with Yeepay as well, Mr. Lee said.

Beijing-based bitcoin exchange OKCoin issued a similar statement on its website that it would no longer work with third-party payment service providers. Users of the site will be able to withdraw their funds within 24 hours, it added. OKCoin didn't respond to emailed requests to comment.

Worries China wants to clamp down on the bitcoin industry stemmed from local media reports earlier in the week on the central bank's warning to third-party payment processors. International bitcoin prices are down more than 30% since Monday, according to industry tracker CoinDesk, which incorporates prices from several large bitcoin exchanges around the world. On Wednesday, bitcoin prices fell another 20% to $550.02, down more than 50% from its high of $1,147.25 two weeks ago.

The Fed revised its FOMC statement. Here is the new one.FOMC Statement

Information received since the Federal Open Market Committee met in September finds that economic activity has continued to expand at a greatly strengthened pace due to the wise guidance and decision making ability of Chairman Bernacke. Labor market conditions have shown great improvement, and provided that the Census Bureau continues to massage the data the Labor Market should be at full employment by May.

Household spending and business fixed investment advanced significantly, showing they have recovered completely from the ravages of the conservative hoard. The recovery in the housing sector continues to impress all with home values reaching pre-crash level. These are sustainable levels as homes are in greater demand than ever before. Contrary evidence of loan officers' rapidly dwindling cash reserves; higher mortgage rates and many Realtors leaving to pursue seasonal employment at local big box retailers is of no concern.

Fiscal policy is correct, despite conservative Congressional gridlock and dysfunction. Rampant public consternation over the Affordable HealthCare Act is misplaced fear, but is not restraining economic growth as claimed by Tea Party members. Apart from fluctuations due to changes in energy prices and food costs, no indicate of less than ideal inflation exist, and as long as the CPI continues to be manipulated, longer-term inflation expectations remain stable.

Consistent with its statutory mandate, the Committee seeks to foster economic Nobel Prizes for Committee members. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace since equities continue to gain 20% annually. and the unemployment rate will quickly decline with the exception of certain current NFC East head coaches or unless UPS conducts mass layoffs due to Amazon Drone Deliveries and as pizza sales soar for WA and CO "herb" enthusiasts toward levels the Committee judges consistent with its dual mandate.

The Committee sees the downside risks to the outlook for the economy and the labor market as being non-existent, since even unqualified, schizophrenic sign language interpreters can gain employment and due to burgeoning IT hiring following HealthCare.gov's launch debacle. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term as MBS purchases increase to 75% of total issuance.

Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more Edward Snowden leaks on NSA's FOMC surveillance and new imaginative Miley Cyrus videos that we can drool over before increasing the pace of its purchases. Accordingly, the Committee has decided to fake a Taper until we catch our breath after watching the videos.

In light of FHFA's looming "risk based pricing adjustments and to build further anticipation for release of next Fed Minutes, The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities and rolling into Atlantic City keno investments and Power Ball lotteries. These actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.

The Committee will closely monitor incoming information on point spread changes for BCS Championship Game; and the freeze resistant Manhattan cockroaches until the labor market is at 150% employment. In judging when to moderate the pace of asset purchases, the Committee will at its coming meetings, assess whether Committee Christmas gift expenditures and the current chairman's retirement compensation packages are on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's greed.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy, generous holiday tips for domestic staff and aggressive Mega Millions lottery ticket purchases will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate to the end of the decade. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of complete New World Order global power and replacing the legislative branch of federal government with Committee controlled cyborgs.

The Fed revised its FOMC statement. Here is the new one.FOMC Statement

Information received since the Federal Open Market Committee met in September finds that economic activity has continued to expand at a greatly strengthened pace due to the wise guidance and decision making ability of Chairman Bernacke. Labor market conditions have shown great improvement, and provided that the Census Bureau continues to massage the data the Labor Market should be at full employment by May.

Household spending and business fixed investment advanced significantly, showing they have recovered completely from the ravages of the conservative hoard. The recovery in the housing sector continues to impress all with home values reaching pre-crash level. These are sustainable levels as homes are in greater demand than ever before. Contrary evidence of loan officers' rapidly dwindling cash reserves; higher mortgage rates and many Realtors leaving to pursue seasonal employment at local big box retailers is of no concern.

Fiscal policy is correct, despite conservative Congressional gridlock and dysfunction. Rampant public consternation over the Affordable HealthCare Act is misplaced fear, but is not restraining economic growth as claimed by Tea Party members. Apart from fluctuations due to changes in energy prices and food costs, no indicate of less than ideal inflation exist, and as long as the CPI continues to be manipulated, longer-term inflation expectations remain stable.

Consistent with its statutory mandate, the Committee seeks to foster economic Nobel Prizes for Committee members. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace since equities continue to gain 20% annually. and the unemployment rate will quickly decline with the exception of certain current NFC East head coaches or unless UPS conducts mass layoffs due to Amazon Drone Deliveries and as pizza sales soar for WA and CO "herb" enthusiasts toward levels the Committee judges consistent with its dual mandate.

The Committee sees the downside risks to the outlook for the economy and the labor market as being non-existent, since even unqualified, schizophrenic sign language interpreters can gain employment and due to burgeoning IT hiring following HealthCare.gov's launch debacle. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term as MBS purchases increase to 75% of total issuance.

Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more Edward Snowden leaks on NSA's FOMC surveillance and new imaginative Miley Cyrus videos that we can drool over before increasing the pace of its purchases. Accordingly, the Committee has decided to fake a Taper until we catch our breath after watching the videos.

In light of FHFA's looming "risk based pricing adjustments and to build further anticipation for release of next Fed Minutes, The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities and rolling into Atlantic City keno investments and Power Ball lotteries. These actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.

The Committee will closely monitor incoming information on point spread changes for BCS Championship Game; and the freeze resistant Manhattan cockroaches until the labor market is at 150% employment. In judging when to moderate the pace of asset purchases, the Committee will at its coming meetings, assess whether Committee Christmas gift expenditures and the current chairman's retirement compensation packages are on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's greed.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy, generous holiday tips for domestic staff and aggressive Mega Millions lottery ticket purchases will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate to the end of the decade. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of complete New World Order global power and replacing the legislative branch of federal government with Committee controlled cyborgs.

Crafty, 12/18/13:...b) What the hell is wrong with deflation?c) How did this piece wind up on the front page of the WSJ? [low inflation is a problem??]

1. See your post in Economics, (Wesbury then making Scott Grannis' point now): 7/1/13:http://dogbrothers.com/phpBB2/index.php?topic=1023.msg73491#msg73491

2. Deflation tends to be self sustaining: hard to snap out of, limited policy options available to address it. From the WSJ article: "Central bankers worry about inflation falling too low because it raises the risk of deflation, or generally falling prices, a phenomenon that is difficult to combat through monetary policy. Some economists believe weak or falling prices can lead consumers to delay major purchases, exacerbating an economic slowdown. Even without deflation, very low inflation can be a sign of weak demand that weighs on wages, corporate profits and growth."

The MIT Dictionary of Modern Economics defines deflation as “A sustained fall in the general price level.”1 Deflation represents the opposite of inflation, which is defined as an increase in the overall price level over a period of time. In contrast, disinflation, represents a period when the inflation rate is positive, but declining over time.

Deflation, inflation, and disinflation represent different behavior of the price level. The price level is commonly measured using either a Gross Domestic Product Deflator (GDP Deflator) or a Consumer Price Index (CPI) indicator. The GDP Deflator is a broad index of inflation in the economy; the CPI Index measures changes in the price level of a broad basket of consumer products. The Chart shows the monthly percentage change in the CPI (all urban consumers, all items) over the prior 12-month period, and includes periods of deflation, inflation, and disinflation in consumer prices.

Two brief periods, the first from approximately mid-1949 to mid-1950, and the second, approximately from the fall of 1954 to the summer of 1955, shown in Chart, indicate brief periods of deflation in the consumer price index. Other than these two brief periods, the CPI Index shows inflation in consumer prices over nearly the entire 1947 to 1999 period. The period from mid-1980 to mid-1983 indicates a period of disinflation, a period when the rate of inflation was declining from month to month.

Periods of deflation typically are associated with downturns in the economy. The two temporary periods of deflation corresponded to recessions in the U.S. economy. However, periods of deflation need not be as short as these two brief episodes in the 1950s. During the Great Depression of the 1930s the nation experienced a long period of deflation. As noted by Samuelson and Nordhaus (1998), “Sustained deflations, in which prices fall steadily over a period of several years, are associated with depressions, such as occurred in the 1930s or the 1890s.”2

References

1. Pearce, David W., editor. The MIT Dictionary of Modern Economics. 1992. MIT University Press.

"a) We here have vociferously predicted inflation. Why have we been so wrong?"

Scott Grannis: "Why then has U.S. inflation remained low and slowed of late if the Fed is doing all it can to keep interest rates low? I fleshed out the answer to this question in a post earlier this month: it's because we have been experiencing the most risk-averse recovery ever. Risk aversion and a general lack of confidence have translated into very strong demand for money and bank reserves." From that previous post: "The recovery from the recent Great Recession has been the weakest ever, and that may have a lot to do with the fact that this has also been the most risk-averse recovery ever. Households have deleveraged like never before; the world has stocked up on cash and cash equivalents like never before; banks have accumulated massive amounts of excess reserves; and business investment has been weak"

And demand for money and bank reserves, is the opposite of new investment and demand for goods and services.

Stagnation with inflation is possible, see Jimmy Carter, but generally a slow moving, stagnant economy (with money on the sidelines) does not bid up prices.

Risk aversion means an investment stall. Bidding up the price of existing companies is not investment IMO, building new plants and starting real new companies is. This economy lacks energy, velocity, investment and demand, along with lacking employment and economic growth.

Today banks hold a whopping $2.5 trillion in excess reserves, according to former Fed Governor Alan Binder, WSJ, which means that money is on the sidelines, not chasing goods and services.

It seems that the trillions in quantitative expansion are neither stimulating the economy nor driving up current price levels because that money is on the sidelines.

Grannis introduces his first with this: "Let's begin by taking a look at inflation in the U.S. as measured by the Consumer Price Index." and that chart shows a trend line of 2.4% annual price increases, actually a little lower of late. But CPI does not directly measure inflation IMHO, it is an indicator or symptom of inflation which is strictly a monetary phenomenon. In this case, CPI measures the effect of the money in circulation, but not the future effect of trillions accumulating in reserve that could enter circulation.

The problem with our economy today is not a lack of liquidity (money) and so the solution was not an injection of money. The problems are overly-burdensome taxes, regulations and uncertainty, along with many other screwed up disincentives to produce, none of which are addressed by the Feds flailing attempt the second of its two mandates - stimulating employment. (Meanwhile we are implementing the largest anti-employment act in our nation's history.)

The question (in my mind) is not why haven't price levels gone through the roof in a stagnant economy, but what will price levels do if things ever get rolling again, and multiples of those multiples of trillions come into circulation via the banking system.

Luckily nothing on the horizon looks like a robust economy headed our way and none of our underlying problems are even beginning to be addressed.

Even if the fear of deflation is unfounded, that fear is the stated reason the the Fed's inflation target is 2% instead of zero. The Fed knows how to move the policy levers up or down a little bit at 2% inflation, but not when inflation hits zero or goes negative. Where do you go with interest rates after you hit zero? Negative interest rates? You can pay people to hold free money but they don't have to invest it in the economy to make money.

Because we have permanent inflation with a long term CPI trend line at 2.4%, not zero, and an inflation target going forward of 2%, not zero, a dollar in the future is worth less than a dollar today. The only possible exception is a worse outcome: a deep, prolonged economic depression.

Coincidentally we are a massive debtor nation with the power to devalue our debt by devaluing our currency. We use devalued future dollars to pay today's unpaid bills. (BLS inflation calculator: http://data.bls.gov/cgi-bin/cpicalc.pl) If we really had to borrow all of our revenue shortfall, rather than print most of it (issue "excess reserves"), lenders would charge for that loss and the cost of our debt would be prohibitive.

Stated more directly, the current fiscal and monetary path is unsustainable and everyone knows it.

Third Banker, Former Fed Member, "Found Dead" Inside A Week If the stock market were already crashing then it would be simple to blame the dismally sad rash of dead bankers in the last week on that - certainly that was reflected in 1929. However, for the third time in the last week, a senior financial executive has died in what appears to be a suicide. As Bloomberg reports, following the deaths of a JPMorgan senior manager (Tuesday) and a Deutsche Bank executive (Sunday), Russell Investments' Chief Economist (and former Fed economist) Mike Dueker was found dead at the side of a highway in Washington State. Police said the death appeared to be a suicide. ' zerohedge.com

Deep in the unregulated underbelly of the Internet, bitcoin is the crypto-currency of the realm, making as many headlines for its volatile price as it has for its popularity with criminals seeking anonymity.

These are reasons enough to keep most people away. But bitcoin keeps popping up in more places as a way to pay for legal, everyday things. So I spent a week using the virtual currency and my experience surprised me: It was neither anonymous nor shadowy.

Though my hunt for places to spend bitcoin did turn up a questionable massage parlor, it didn't require venturing into fishy corners of the Internet. I used bitcoin to buy cupcakes and sushi at local shops, and I got a Grumpy Cat sweatshirt at Overstock.com.

Bitcoin isn't ready to replace credit cards or PayPal. It lacks wide acceptance, consumer protections and stability. The currency is in crisis right now, after hacking attacks disabled two of the biggest exchanges, making bitcoin lose a third of its value. During the course of a week, my own bitcoin lost as much as 7% of its value.

But that isn't stopping me from keeping a small wallet of the first major Internet currency. I'm no speculator, I'm not investing my savings in bitcoin, or recommending that anyone does that. I'm interested in what it might enable—a "tip jar" for online art, or small daily donations to charity. And if you're intrigued, too, this column will hopefully help you keep from losing your shirt.

The good news is you don't have to put much money at risk to try it out. I didn't even buy an entire "coin"—just 0.25 of one, or about $160. I signed up for a virtual wallet, which promises to safeguard the string of code that is your money, and exchanges dollars for bitcoin (and vice versa). I recommend Coinbase, whose wallet connects to your regular bank account and charges a small fee, about 1%, with each trade.

Are these people trustworthy? Coinbase is backed by some big names in Silicon Valley, but has nothing like the government-backed guarantees of using dollars in a regular bank. In the past 15 months, Coinbase says it has set up nearly one million consumer wallets.

What surprised me most is how Coinbase strips some anonymity out of the currency. To buy bitcoin, it asked me for my bank account information, my credit-card numbers, even my bank website login details. The company doesn't retain all that info but it is used to speed up the verification process, which can normally take four days.

The point of gathering all this information, says CEO Brian Armstrong, is to prevent "shenanigans," so the traditional banks will see Coinbase as legitimate.

Coinbase has done a good job of simplifying bitcoin use. To pay for sushi at a local shop, I used the Coinbase app on my Android phone to scan the QR code presented by my server. (Apple hasn't yet approved the Coinbase app for iPhone, but you can make payments via the Web.)

Once I confirmed my sushi payment, the money transferred instantly. For consumers, bitcoin's speed can be a dual-edged sword: If something goes wrong, there's no third party to intercede and get your money back. And returns can be tricky on a currency with a wildly fluctuating value. (Fortunately, I had no complaints about my sushi.)

Making a purchase online works much the same. At the Overstock.com checkout page, I chose to pay by bitcoin, and then scanned an on-screen code with my phone.

So why bother using bitcoin? Bitcoin doesn't really solve mainstream consumer problems like speed and convenience, says Mark T. Williams, who teaches finance at Boston University and is a bitcoin skeptic. "It solves a problem if you want to send stuff secretly."

Though Coinbase and other wallets collect information about you, you can still try to make transfers or payments anonymous. If someone gives you bitcoin, you can set up a Coinbase wallet without entering many personal details—though you'll need to verify yourself if you want to turn your bitcoin back into dollars.

Getting merchants on board will be a slog. Some 3,000 businesses around the world accept bitcoin for payment, according to Coinmap.org. There are more than 60 in the San Francisco Bay Area where I live, but I still struggled to find places worth spending my bitcoin. When I did, paying with bitcoin was usually speedy, but certainly not faster than using a credit card or cash.

Overstock is planning to offer a financial incentive to paying with bitcoin. Since bitcoin payments save the retailer credit-card fees, Overstock will give bitcoin customers 1% back on their purchases (in store credit).

So far, the killer app for bitcoin may be international transfers, a process made costly and slow by traditional banks and services like PayPal. I tried sending $10 worth of bitcoin to my friend Kevin in Hong Kong. In minutes, he was up on Coinbase and zapping the money back to me. I sent it over the Pacific again, impressed at our ability to play ping pong with a financial process that normally takes days.

But when Kevin tried to spend his bitcoin in Hong Kong, opportunities were slim. He found a massage parlor that accepts it, but his wife wasn't impressed with his proposal to sample its services. Eventually Kevin found a florist (wife-approved), but I hadn't sent him enough to buy a bouquet. To buy more bitcoin, a legitimate-seeming Hong Kong wallet company asked for his passport, proof of address—and more time.

Someday, all of this might be easier. Taking a vacation with bitcoin might provide a way to avoid international currency and credit card fees. But that day isn't here yet.

"Some day"—I found myself thinking that a lot while using Bitcoin. It may be a currency of the future, but it's still looking for a reason to be useful in the present.

The Producer Price Index (PPI) declined 0.1% in February, coming in below the consensus expected gain of 0.2%. Producer prices are up 0.9% versus a year ago.The decline in the PPI in February was all due to services, which dropped 0.3%, led lower by trade services, down 1.0%. Goods, which include food and energy, were up 0.4%.In the past year, prices for goods are up 0.6% while service prices are up 1.0%. Private capital equipment prices increased 0.1% in February and are up 1.8% in the past year.Prices for core intermediate processed goods rose 0.6% in February and are up 0.4% versus a year ago. Prices for core unprocessed goods decreased 0.7% in February, and are down 3.3% versus a year ago.

Implications: The impact of the new final-demand format, introduced last month for reporting producer prices, came to the forefront in today’s report. The old PPI format only included prices for goods prices, which increased 0.4% in February and are up at a 5.1% annual rate in the past three months. But the new format includes both goods and services, combined; in fact, services now account for more than 60% of the index. As a result, with service prices falling 0.3% in February, the price index for overall final demand dipped 0.1%. “Core” prices, which exclude food and energy, were down 0.2%. Given the dip in the headline PPI index for February, some analysts will say the Federal Reserve should stop tapering quantitative easing, because inflation still appears below its target of 2%. We think this would be a mistake. If anything, the Fed should be considering an acceleration in the pace of tapering, so quantitative easing ends well before the end of the year. The problems that ail the economy are fiscal and regulatory in nature; continuing to add more excess reserves to the banking system is not going to boost economic growth. Despite the negative inflation headline, intermediate demand prices for processed goods continue to climb, up at 7.2% annual rate over the past three months, though prices still remain tame compared to year-ago levels. Unprocessed goods, led by fuel and nonfood materials, rose 5.7% in February and are up at a 41.3% annual rate in the past three months. For now, service prices are holding down broad price gains at the producer level, but, given loose monetary policy, service prices should eventually turn up as well.

During Fed Chair Janet Yellen’s first press conference last week, some analysts said she made a major mistake. Supposedly, she put an actual time limit on when the Fed may start to lift the federal funds rate.

She said it would be “around six months” after the Fed ended any further purchases of bonds for its Quantitative Easing program. This could be true, but she used enough qualifiers that it became clear six months is not a hard target.

The Fed dropped its 6.5% jobless rate as a trigger point for raising rates, and will now follow a long list of indicators to determine when the job market is functioning well. In other words, when Janet Yellen says she wants “full employment,” we assume she means for Fed Watchers.

Even Minneapolis Fed President Kocherlakota, a dove when it comes to monetary policy, had a problem with this. He dissented with his vote, saying, “If you’re not specific in the statement, then market participants are just grasping for scraps of information.” He wanted an explicit, but lower, unemployment rate target before raising interest rates.

But all of this is becoming moot. The federal funds rate has rapidly become a non-issue for monetary policy. In the past, the Fed manipulated the funds rate by making reserves “scarce” or “plentiful.” It withdrew reserves to push rates up and added reserves to push rates down – a simple “supply and demand” calculation.

So, when rates went up, the Fed was tightening and when rates went down, the Fed was easing. This was a classic monetarist view of the world. However, now that the Fed has injected $2.6 trillion in “excess reserves” via QE, there is no way to make reserves “scarce” without completely unwinding the Fed’s balance sheet.

As long as banks have excess reserves, they do not need to borrow reserves from other banks to meet their reserve requirements. In fact, over the past few years, as excess reserves have piled up, the amount of actual trading in the overnight reserve market has contracted sharply.

The Fed debated this problem way back in 2008. Fed Governor Donald Kohn thought the Fed had lost control of the funds rate. However, Janet Yellen, then the President of the San Francisco Fed, said the Fed could control the funds rate by raising the interest rate it paid on excess reserves (currently 25 bps). The idea was that by raising the rate on excess reserves, the few banks who were participating in the overnight reserve market would demand higher rates.

The only problem is that most of the lending in the overnight reserve market is done by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks who, by law, are not allowed to be paid interest by the Fed on excess reserves.

So, while it is possible that lifting the interest rate on excess reserves could lift the federal funds rate, too, it is not 100% clear that this will work. Nor is it clear that it will change monetary policy all that much.

With so many excess reserves in the system, higher interest rates would not, in themselves, tighten money in the system. Only if the Fed paid banks more to hold reserves at the Fed than they could earn by lending them to customers could the Fed affect money growth. If banks decided to lend excess reserves anyway, the Fed would be forced to shrink its balance sheet, or face an explosion of money growth.

In other words, the federal funds rate has become an anachronism. Six months? Twelve months? Twelve years?. Who cares? Excess reserves are all that matters.

Not sure I agree with Brian on this. I think the Fed can raise the interest rate on reserves and that will have the same effect as reducing the amount of reserves. They will probably do both.

Banks will have excess reserves in abundance for a long time no matter what they choose to do. They can choose to increase lending or not increase their lending. If they increase their lending it would probably be because the risk-adjusted return on their lending is expected to be greater than the risk-free rate they receive on their reserves. If reserves suddenly paid 5%, would banks want to increase their lending? Or would they be happy just to keep their reserves?

At any given time, there must be an interest rate on reserves that makes increased lending unattractive. The Fed can experiment with the rate it pays on reserves to find the level that keeps bank lending from being excessive.

Monetary policy lately has been like adding gas to a car that already had the tank full but had 3 flat tires and 2 brakes struck on. The additional gas won't go in, didn't do any good or harm, and the car keeps showing the same lousy symptoms after the gas spills out on the ground.

A tight dollar not was the problem of the last decade and a loose dollar was not the solution. (Nor was cash for clunkers, ACA, raising the minimum wage, immigration reform, Solyndra, shovel-ready jobs or any other phony initiative we have seen.) The loosening and tightening of reserves will only matter after the real problems that are preventing economic expansion are addressed. For now the excess reserves just sit idle.

A friend who runs a venture capital business told me last week that banks have plenty of money to lend but will only put 50% into a good company transaction instead of perhaps 80% previously and suggested they only lend to known entities whom they know and trust. They will not lend to unknowns or startups. The price and quantity of money (on the sidelines) is not the limiting factor right now. Instead there is a shortage of proven, solid companies wanting or needing expansion capital in an environment poisoned by over-taxation and over-regulation. Loose money did not stimulate and tightening now will not significantly affect our stalled, Pelosi/Reid, Obamanomic economy.

Consumer-price growth in the world's largest economies slowed for the third straight month in February, fueling concerns that too little inflation, rather than too much, could threaten the global economy's fragile recovery.

The Organization for Economic Cooperation and Development on Tuesday said the annual rate of inflation in its 34 members fell to 1.4% from 1.7% in January, while in the Group of 20 leading industrial and developing nations it fell for a third straight month, to 2.3% from 2.6%. The G-20 accounts for 90% of global economic activity.

The continuing decline in the rate of inflation across developed countries will worry central bankers, since many regard annual price rises of 2% as consistent with healthy economic growth. The decline in the inflation rate was driven by lower energy prices, while the core rate of inflation in the OECD—excluding energy and food—was unchanged at 1.6%.Related Coverage

When inflation is low, companies, households and even governments have a harder time cutting their debt loads, a particular problem for a number of highly indebted nations in the euro zone.

When prices start to fall, consumers can postpone purchases in the expectation that they will get better value for their money in the future. That can in turn weaken economic activity, and create further deflationary pressures. Following the difficulties Japan has experienced in getting out of its long period of deflation, central banks in other countries are anxious to avoid a similar struggle.

The OECD said six of its members experienced a decline in prices over the 12 months to February—all being in Europe.

The threat of low inflation, and the possibility that prices may start to fall, is most pressing for the European Central Bank, whose governing council meets on Thursday. Figures released on Monday showed consumer prices rose in the euro zone by 0.5% in the 12 months to March, a decline in the annual rate of inflation from 0.7% in February.

But the euro zone is far from alone in confronting a period of uncomfortably weak inflationary pressures. In the U.S., the annual rate of inflation fell to 1.1% in February from 1.6%, while in Canada it dropped to 1.1% from 1.5%.

There were also significant declines in large developing economies that have in recent years driven global economic growth and have been the leading source of inflationary pressures. The annual rate of inflation fell to 2.0% from 2.5% in China, and to 6.7% from 7.2% in India.

Federal Reserve officials are growing concerned the U.S. inflation rate won't budge from low levels, the latest sign of angst among central bankers about weakness in the global economy.

The Fed began 2014 hopeful that a strengthening U.S. economy would push very low inflation from 1% toward the 2% level that officials associate with healthy business activity. Three months into a year marked by unusually harsh winter weather, which appears to have damped economic growth, there is little evidence of such movement.

Fed officials expressed worry about the persistence of low inflation at a policy meeting last month, according to minutes of the meeting released by the central bank Wednesday. They discussed at the March 18-19 meeting whether to make a more explicit commitment to keeping short-term interest rates pinned near zero until they saw inflation move up, but chose instead to take a wait-and-see approach.

Low inflation is high on the agenda of global central bankers and finance ministers gathering in Washington this week for semiannual meetings of the International Monetary Fund. Bank of Japan officials are trying to overcome more than a decade of on-again-off-again deflation, and inflation in Europe is running close to zero.

"We think there is also a risk of deflation, negative inflation. And we think that if this were to happen, this would make the adjustment both at the euro level, and even more so for the countries in the periphery, very difficult," IMF chief economist Olivier Blanchard said of Europe on Tuesday, after the IMF released updated economic projections. "We think that everything should be done to try to avoid it."

On its face, flat consumer prices sound like a blessing that holds down household costs. But when tepid inflation is associated with small wage gains, excess business capacity and soft global demand, as now, economists see it as a sign of broader economic malaise that restrains investment and hiring. Exceptionally slow wage and profit gains also make it harder for household and business borrowers to pay off debt.

Fed officials believe the U.S. economy was soft in the early months of the year in part because of the weather, and they are now expecting a pickup. But if that doesn't happen, they could wait longer to start raising interest rates. Many central-bank officials and market participants don't expect rate increases until well into 2015.

"In light of their concerns about the possible persistence of low inflation, members agreed that inflation developments should be monitored carefully," the Fed minutes said.

IMF officials have been chiding European Central Bank officials, in particular, for failing to do enough to lift inflation in the euro area from well below 1%. Like the Fed, the ECB expects inflation to rise this year, but it is under greater pressure to act.

The IMF reduced its growth and inflation forecasts for 2014 and 2015 in projections released this week. It sees consumer-price inflation in developed economies this year of 1.5%, compared with 1.4% in 2013. It expects global growth this year of 3.6%, better than the 3% growth in 2013, but less than the 3.7% growth it projected in January.

Bruce Kasman, chief economist with J.P. Morgan Chase, said inflation is also softening in developing economies, most notably China. The development, he said, is taking pressure off central banks in places like India and Turkey to raise interest rates to prevent their economies from overheating.

"Six months from now, I think we'll see that inflation in the emerging markets is materially less than it was a year ago," Mr. Kasman said.

For years since the financial crisis ended, critics have warned central bankers that their low-interest-rate policies risked pushing consumer prices much higher as they flooded the world financial system with money.

But weak demand in many developed economies, combined with excess supply in places such as China, have hampered firms from raising consumer prices.

"Below-target inflation is a world-wide phenomenon, and it is difficult to be confident that all policy makers around the world have fully taken its challenge on board," said Charles Evans, president of the Federal Reserve Bank of Chicago, in a speech in Washington on Wednesday.

The Commerce Department's personal consumption expenditures price index, which is the Fed's favored measure of inflation, was up 0.9% in February from a year earlier. The Labor Department's consumer-price index, an alternative measure, was up 1.1%.

Low inflation is high on the agenda of global central bankers and finance ministers gathering in Washington this week for semiannual meetings of the International Monetary Fund. Above, the Federal Reserve building in Washington.

The aluminum sector offers one stark view of the global tides holding down inflation. Aluminum prices are in the third year of a decline that has dented profits at the world's top producers and caused them to cut capacity to try to end an aluminum glut that analysts say has lasted for more than a decade.

Since April 2011, at a time when stimulus measures in China and the U.S. were boosting metals prices, raw aluminum prices on the London Metal Exchange have dropped more than 35% to around $1,800 a ton. The average cost of making raw aluminum at a smelter is around $2,000 a ton, so many smelters around the world have been operating at a loss.

At some point, the oversupply will run its course, but it doesn't appear to have happened yet. On Tuesday, Alcoa Inc., AA +3.75% the world's top aluminum producer by revenue, said it swung to a net loss of $178 million, or 16 cents a share, from a profit of $149 million a year earlier, mainly because prices for raw aluminum fell 8% year-over-year. It also took a $255 million charge related to closing plants in Brazil, Australia and upstate New York. Alcoa said those closures eliminated 421,000 tons, or 10% of its overall capacity. Russia's United Rusal 0486.HK +1.37% PLC, the world's No. 1 producer by volume, is planning to reduce production by 330,000 tons, or 8%, in 2014.

Although Chinese government officials have pledged to reduce capacity, cuts have been resisted by local leaders eager to preserve jobs. Aluminum production in China is expected to increase 9% this year and 7% next year, according to Deutsche Bank.

In the U.S. and Europe, signposts of soft consumer demand also are evident. In Switzerland, executives at Swatch Group AG told The Wall Street Journal earlier this month that consumers were switching to lower-cost timepieces. In the U.S., companies such as Procter & Gamble Co. and Georgia Pacific Corp., among others, have been blitzing consumers with deals and coupons to lift sales.

Carnival Corp. is filling cabins on its cruise ships by reducing ticket prices—a situation the Miami-based company hopes is temporary. "As the economy improves and as demand is there, we should be able to get the pricing back without any problem," Chief Financial Officer David Bernstein told analysts last month.

The Producer Price Index (PPI) rose 0.5% in March versus a consensus expected gain of 0.1%. Producer prices are up 1.5% versus a year ago.All of the increase in producer prices was due to services, which were up 0.7%. Goods prices, including food and energy, were unchanged.In the past year, prices for service are up 1.5% while goods prices are up 1.2%. Private capital equipment prices increased 0.1% in March and are up 1.6% in the past year.Prices for intermediate processed goods declined 0.2% in March but are up 0.8% versus a year ago. Prices for intermediate unprocessed goods declined 0.1% in March, but are up 5.9% versus a year ago.

Implications: After dropping slightly in February, producer prices surged 0.5% in March. Both the decline in February and the spike in March were led by prices in the service sector, which, until recently, weren’t even counted in producer prices. Cutting through the month-to-month volatility, it appears inflation is starting to wake up from its slumber. Producer prices are up 1.5% in the past year but up at a 2.2% annual rate in the past three months. The acceleration is in prices for both goods and services. Goods prices are up 1.2% in the past year but have climbed at a 3.2% annual rate in the past three months; services are up 1.5% from a year ago but have climbed at a 1.9% rate in the past three months. Prices further back in the production pipeline (intermediate demand) are showing similar acceleration. For example, although prices for processed goods are up only 0.8% in the past year, they’re up at a 4.3% annual rate in the past three months. Unprocessed goods are up 5.9% in the past year but up at a 28.8% annual rate in the past three months. Figures like these suggest the Federal Reserve should be tapering quantitative easing faster. In other recent inflation news, import and export prices surged in March, increasing 0.6% and 0.8%, respectively. However, overall import prices are still down 0.6% from a year ago, all due to a decline in petroleum. Excluding petroleum, import prices have increased 0.1% from a year ago. Export prices are up 0.2% from a year ago, 0.4% excluding farm products. In broader news on the economy, initial unemployment claims declined 32,000 last week to 300,000, the lowest level in almost seven years. Continuing claims dropped 62,000 to 2.78 million. As a result, our early payroll models suggest job growth of about 200,000 in April. After a winter hibernation, the Plow Horse economy has woken up and is ready to go

I appreciate the Wesbury posts. That said, I don't recall him telling us we were not experiencing Plow Horse growth this past winter. Spinning only the positive? Positive economic performance reported last fall was adjustted downward, BTW.

"After a winter hibernation, the Plow Horse economy has woken up and is ready to go"

Today’s policy statement from the Federal Reserve was about as close to a non-event as possible. The Fed acknowledged that the US economy “has picked up recently” since the first quarter, citing faster growth in consumer spending. However, it also noted a drop in business investment. Other than that, the Fed made no notable changes to its policy statement and there were no dissents.As expected, the Fed announced it would reduce its monthly purchases of Treasury securities and mortgage-backed securities by another $5 billion each ($10 billion total) to $45 billion starting in May. This follows a tapering of $10 billion announced at each of the three prior meetings in December, January, and March. So the size of the Fed’s balance sheet will continue to rise, but slightly more slowly than before.

Our view is that the Fed will continue to taper quantitative easing (QE) and probably finish expanding its balance sheet this fall. It should start raising short-term rates by the second quarter of 2015.

The Producer Price Index (PPI) rose 0.6% in April versus a consensus expected gain of 0.2%. Producer prices are up 2.1% versus a year ago.The increase in producer prices was broad based, with both services and goods prices up 0.6%.In the past year, prices for service are up 2.0% while goods prices are up 2.5%. Private capital equipment prices increased 0.6% in April and are up 2.0% in the past year.Prices for intermediate processed goods were unchanged in April, but up 1.5% versus a year ago. Prices for intermediate unprocessed goods increased 0.4% in April, and are up 6.6% versus a year ago.

Implications: The long-awaited upward move in inflation may finally be arriving. Producer prices surged 0.6% in April, the largest monthly gain in more than four years, coming on top of a 0.5% gain in March. In the past year, producer prices have increased a moderate 2.1%. But, in the past three months, producer prices are up at a 4.1% annual rate. The acceleration is in prices for both goods and services. Goods prices are up 2.5% in the past year and have climbed at a 3.9% annual rate in the past three months; services are up 2% from a year ago and have climbed at a 4.1% rate in the past three months. Prices further back in the production pipeline (intermediate demand) are showing similar acceleration. For example, although prices for processed goods are up 1.5% in the past year, they’re up at a 2% annual rate in the past three months. Unprocessed goods are up 6.6% in the past year but up at a 26.4% annual rate in the past three months. Taken as a whole, the trend in producer price inflation suggests the Federal Reserve should be tapering quantitative easing faster. The problems that ail the economy are fiscal and regulatory in nature; continuing to add more excess reserves to the banking system is not going to boost economic growth. Loose monetary policy is finally gaining traction and we expect both real GDP growth and inflation to accelerate in the year ahead.

Angling to Be the MasterCard of BitcoinThe 31-year-old CEO of Coinbase on his plan to become the world payment processor for the virtual currency. Could this be the end of credit cards?By Andy KesslerMay 16, 2014 6:07 p.m. ET

San Francisco

As I drive into San Francisco to meet tech entrepreneur Brian Armstrong, reminders of the California Gold Rush pop up everywhere, from Levi Strauss to the San Francisco 49ers. Various modern gold rushes have periodically swept the area for the past few decades, and the 31-year-old Mr. Armstrong is at the forefront of the latest frenzied scramble: virtual currency.

Bitcoin is the dominant player in the field, and Mr. Armstrong, as the CEO of Coinbase, thinks he has found a rich vein to mine. He wants to be the Visa V +1.14% and MasterCard MA +0.92% of Bitcoin payment processing, taking those behemoths out of the picture as merchants and customers move to virtual transactions.

Credit-card companies "collect $500 billion in fees" today, he says confidently as we meet in the company conference room overlooking San Francisco Bay. As commerce eventually turns increasingly virtual and credit-card fees drop to match cheaper technology, he says, "it's going to be $50 billion."

But wait . . . Bitcoin? A lot of people still aren't sure what a virtual currency is, much less what a "Bitcoin wallet" like Coinbase might be. Mr. Armstrong offers a working Bitcoin definition for starters: "It's a distributed digital currency. There's no central authority. It's based on a consensus of people working on this around the world. It's both a currency and a payment method and a protocol, a commonly agreed-upon language so that computers can talk to each other and exchange currency or payments, at least at first."

The number of Bitcoins is capped at 21 million (about 12 million have been generated so far by an algorithmic method using Bitcoin's agreed-upon protocol), making them immune to the sort of government money-pumping or -restricting policies that can send real-world currencies up or down. Bitcoins are simply worth whatever those who trade in them agree they're worth.

The peer-to-peer payment system has suffered some public-relations disasters: In 2013, the FBI shut down the platform Silk Road, which may have earned $80 million in commissions from allegedly facilitating more than $1 billion in drug trafficking. The biggest Bitcoin exchange—Mt. Gox in Japan—collapsed in February. In the process Mt. Gox lost $450 million in Bitcoins, though they seem to have been later rediscovered—it's still not clear, which reflects the moving-target reputation of Bitcoin that still makes many investors wary.

"There are still people who we meet who say there is no way the government is going to let this happen," Mr. Armstrong says, "but they don't have the information we have." So far, he seems to have embraced the prospect of regulation in a nascent industry with an all too Wild West reputation.

When he founded Coinbase two years ago with Fred Ehrsam, Mr. Armstrong says, "our risks were fraud and compliance." But in March last year, the Treasury Department's Financial Crimes Enforcement Network, known as FinCEN, offered some clarification, providing guidance on virtual currency.

"A week later we registered with FinCEN as a money-services business. A good first step," Mr. Armstrong says. "Compliance is a large cost of our business. Our method is not battling, but embracing and educating regulators, building relationships with them." He notes that "New York state is thinking about how they can create a specific 'bit license,' " sort of a money-transmitting license for virtual-currency companies. "Even the IRS released guidance on how they will collect taxes on Bitcoin gains. The regulatory environment is much clearer today than it was a year ago and it's all been very positive."

It's rare to hear a CEO so chipper about the U.S. regulatory environment, but then participating in the Bitcoin world requires a certain faith in the benevolence of strangers. That was certainly the case at the company where Mr. Armstrong worked before starting Coinbase: Airbnb, the do-it-yourself lodging-booking business that is roiling the hotel industry. Mr. Armstrong, who graduated from Rice University in 2005 with degrees in economics and computer science, had spent a few years working for the Deloitte professional-services firm and for a few startups in Silicon Valley before going to Airbnb in 2011, when the company had just 35 employees.

Working on fraud prevention and proprietary payments for 190 countries as the company grew with dizzying speed, he says, "I had a front-row seat to the pain point." When Mr. Armstrong left after 18 months to start Coinbase, Airbnb had 600 employees. Growth has been slower for Coinbase, but the trend line is clearly up. Coinbase says it now administers 1.2 million Bitcoin wallets.

Here's how the company got there in two years. Mr. Armstrong, who speaks with the intensity of a seasoned entrepreneur but none of the bravado of many Silicon Valley players, relates how in December 2010, while home in San Jose for the holidays, he printed out a copy of the Satoshi white paper, the original Bitcoin manifesto published in 2008 under a still-mysterious pseudonym. He became engrossed. His mother, he says, told him "all our relatives are here, you need to come spend time with the family." But he stayed upstairs reading. "I couldn't put it down, it was the most important thing I've read," he recalls. "I saw right away this could be a big open payment network for the world. Very much like the Internet was for distributing data."

Six months later, he slapped together an app for Android phones, a "wallet" to store Bitcoins. More than 15,000 people installed it in the first week, and others translated it into German, Russian and Chinese. It was the moment he realized he was onto something. But the app was flawed. It stored money on a phone, which is breakable, and, worse, the app hogged so much data that transactions were painfully slow. So he moved the business to servers in the online cloud and, voilŕ, the virtual transactions were easier than a credit-card swipe.

Processing Bitcoin transactions requires two key players: miners and payment processors. Miners solve complex algorithms and are rewarded with Bitcoins when they do. They accomplish this by installing vast arrays of personal computers that run day and night. (Some are located in Iceland to defray electricity bills.) Mining adds transactions to a public ledger, where the buying and spending of Bitcoins is recorded. The ledger is called the "blockchain"—a giant public accounting of every Bitcoin transaction ever. The systems being used to mine Bitcoins must agree on the accuracy of the ledger to prevent cheating, at least in theory. "The more mining there is, the more security there is," Mr. Armstrong says.

Few people were interested in installing expensive machines to mine Bitcoins—until the currency began trading above $100 last year. Now thousands of miners assume that they are digging for virtual gold. In reality, they are building a global payment processing network for Bitcoin.

Payment processors like Coinbase borrow the miners' Bitcoins for a short time to conduct a transaction. The processors enter the transaction into the network, which crunches on it until it is deemed legitimate, and records it in the blockchain.

The financial industry, at first leery of Bitcoin, has slowly relented. "We became the first Bitcoin company to get a deal done with a U.S. bank"—Mr. Armstrong says, declining to name the bank—"which allows us to have anyone connect a bank account in the U.S. and convert dollars in and out of Bitcoin." When Coinbase made the deal in December 2012, the company had 100,000 wallets, a number that increased tenfold in a year.

Bitcoin wallets are mostly about speculation, the hope that the currency will rise in value. That seemed promising for a while. Last year, the value of a Bitcoin soared to $1,100 in December, from $13.30 in January. It's now $448, though transactions are still growing. And now with some 1.2 million Coinbase wallets, customers have Bitcoins to spend. It isn't Visa, but it's a start.

Mr. Armstrong says much of Coinbase's efforts now go into signing up merchants to accept Bitcoins. The roster of sign-ups includes the online retailer Overstock, the Sacramento Kings basketball team, the dating site OkCupid and hundreds of other businesses. Why would they bother? Because Bitcoin payment processors offer a value play: Visa and MasterCard charge merchants about 3% on every transaction, but Coinbase charges 1%—sometimes not even that. "Overstock pays a number less than 1%," Mr. Armstrong confides.

What about the currency's notoriety as a criminal favorite because of its assumed anonymity? "There will always be bad actors," Mr. Armstrong says, noting that Bitcoin lends itself to transparency: "Because, of course, it is a public ledger. In the blockchain, if you see a path here and here," he says, spreading his arms apart, "you can find a path and a connection." And Coinbase is willing to work with law-enforcement to help out.

Mr. Armstrong also doesn't seem worried about Bitcoin's price volatility. "Like the beginning of the Web, there are periods of high expectations and hype that aren't met. . . . There is clearly a gold rush going on right now, and we'll have these cycles of hype and declines."

Yet even with professional backing, how can a roller coaster like Bitcoin disrupt a reliable, predictable payments system offered by credit cards? "Payments flow to the path of least resistance," Mr. Armstrong says. "If there exists a more efficient network, payments will begin to flow to that network."

He sees other opportunities, beyond challenging the credit-card companies by offering lower fees: "A lot of countries don't have a stable currency and people don't have access to banking at all. And everyone has cellphones"—which can be used for access to Bitcoin wallets. "If the world did have access to a stable currency, Bitcoin could help bank the world, bank the unbanked."

It's a nice dream, but Bitcoin fans would do well to keep their focus closer to home for now. Regulatory capture is the way financial services operate. Congress now even sets debit-card fees. Coinbase should be wary of just "embracing and educating" regulators. The companies that collect $500 billion in fees annually can afford a lot of lobbyists, nothing virtual about them.

Mr. Kessler, a former hedge-fund manager and frequent Journal contributor, is the author, most recently, of "Eat People" (Portfolio, 2011).

Bitcoin's Futile Quest to Be a CurrencyThe IRS treats bitcoins as property, and any transaction using them triggers a taxable event.By Lawrence ParksJune 1, 2014 6:26 p.m. ET

Bitcoin is a fascinating and ingenious technology, but most promoters are mindful of neither the monetary nor the tax issues. For all practical purposes IRS regulations issued in March preclude bitcoins from being used as an alternative currency.

The IRS treats bitcoins as property. The result is that bitcoin transactions trigger a taxable event. Buyers incur a tax liability for the difference in dollars between what they paid for a bitcoin when they acquired it and the dollar value attributed to the bitcoin when they spend it. Sellers of course are subject to a tax based on the dollar value of the bitcoins they receive for a good or service.

To comply with these tax regulations, buyers and sellers must log all bitcoin transactions and report them at tax time. For transactions that require future payment, buyers and sellers undertake an exchange-rate risk involving the dollar value of bitcoins. This will greatly reduce, or perhaps eliminate entirely, using bitcoins for settling future payments, which is the principal use of money.

Some bitcoin zealots reject the effect of triggering taxable events on the theory that bitcoin transactions are anonymous. That is arguable. What is not arguable is that one who doesn't report a taxable bitcoin gain is guilty of tax fraud, which is a felony.

In other words, the future of bitcoins depends on users willing to log all transactions, report them at tax time, and pay a tax or to engage in tax fraud. As soon as one of them ends up in prison, that will be the end of it.

Why bitcoins to begin with? We already have a virtual currency, the dollar, which has the purported benefit of being the world's "reserve currency."

Some people see a problem because dollars can be created at the whim of the Federal Reserve, and as former Fed Chairman Alan Greenspan once put it, "without limit." This depreciates the purchasing power of dollars saved or promised for future payment, such as pensions. At least the quantity of bitcoins is supposedly limited by the mathematical algorithm that creates them. As an interesting aside, the bitcoin folks call the creation process "mining," an allusion to real money.

Bitcoin supporters understand that dollars are no longer money in the classical sense, i.e., something that has a unit of dimension defined in the physical world, as Sir Isaac Newton put it circa 1699 when he was England's Warden of the Mint. With neither debate nor anyone voting for it, the dollar has been transmogrified into an ethereal concept of money without any tie to the physical world, created out of nothing, and forced into circulation with legal tender laws.

As Australian comedian Michael Connell so brilliantly put it, what we used to call money has been transformed into "the idea of money." Mr. Connell's metaphor is that it's like playing musical chairs, but instead of chairs there is the "idea of chairs." It is absurd.

This brings to mind a related issue: U.S. Gold and Silver Eagles, which are legal tender for their face amounts under Title 31 of the United States Code. Yet as with bitcoins, the IRS arbitrarily treats these coins not as currency but as property, thereby preventing their use as money.

Consider: If you pay your taxes with a $50 Gold Eagle, you get credit for $50. No mystery there. However, if you spend a $50 Gold Eagle (or a $1 Silver Eagle), you trigger a taxable event on the difference between what you paid for the Gold Eagle and the market value of the gold in the coin when you spend it. Two recent cases challenging the IRS on this matter went up to the Supreme Court, but the court declined to hear the cases.

It is thanks to the IRS that no one uses so-called gold clauses, which would give creditors the right to demand Gold Eagles as payment in contracts. In other words, IRS policy that has no statutory authorization has rendered inoperative gold clause legislation passed by Congress in 1977.

Bitcoins have neither the advantage of being legal tender nor laws enabling their use. Folks who are accumulating bitcoins should take note.

Mr. Parks is the executive director of the Foundation for the Advancement of Monetary Education.

This article was written by Michael Snyder and originally published at The Economic Collapse

When an economy is healthy, there is lots of buying and selling and money tends to move around quite rapidly. Unfortunately, the U.S. economy is the exact opposite of that right now. In fact, as I will document below, the velocity of M2 has fallen to an all-time record low. This is a very powerful indicator that we have entered a deflationary era, and the Federal Reserve has been attempting to combat this by absolutely flooding the financial system with more money. This has created some absolutely massive financial bubbles, but it has not fixed what is fundamentally wrong with our economy. On a very basic level, the amount of economic activity that we are witnessing is not anywhere near where it should be and the flow of money through our economy is very stagnant. They can try to mask our problems with happy talk for as long as they want, but in the end it will be clearly evident that none of the long-term trends that are destroying our economy have been addressed.

Discussions about the money supply can get very complicated, and that can cause people to tune out, but it doesn’t have to be that way.

To put it very basically, when there is lots of economic activity, there is lots of money changing hands.

When there is not very much economic activity, the pace at which money circulates through our system slows down.

That is why what is happening in the U.S. right now is so troubling.

First, let’s look at M1, which is a fairly narrow definition of the money supply. The following is how Investopedia defines M1…

A measure of the money supply that includes all physical money, such as coins and currency, as well as demand deposits, checking accounts and Negotiable Order of Withdrawal (NOW) accounts. M1 measures the most liquid components of the money supply, as it contains cash and assets that can quickly be converted to currency. It does not contain “near money” or “near, near money” as M2 and M3 do.As you can see from the chart posted below, the velocity of M1 normally declines during a recession. Just look at the shaded areas in the chart. But a funny thing has happened since the end of the last recession. The velocity of M1 has just kept falling and it is now at a nearly 20 year low…

Velocity Of Money M1

Next, let’s take a look at M2. It includes more things in the money supply. The following is how Investopedia defines M2…

A measure of money supply that includes cash and checking deposits (M1) as well as near money. “Near money” in M2 includes savings deposits, money market mutual funds and other time deposits, which are less liquid and not as suitable as exchange mediums but can be quickly converted into cash or checking deposits.In the chart posted below, we can once again see that the velocity of M2 normally slows down during a recession. And we can also see that the velocity of M2 has continued to slow down in the “post-recession era” and has now dropped to the lowest level ever recorded…

Velocity Of Money M2

This is a highly deflationary chart.

It clearly indicates that economic activity in the U.S. has been steadily slowing down.

And if we are honest, we have to admit that we are seeing signs of this all around us. Major retailers are closing down stores at the fastest pace since the collapse of Lehman Brothers, consumer confidence is down, trading revenues at the big Wall Street banks are way down, and the steady decline in home sales is more than just a little bit alarming.

In addition, the employment situation in this country is much less promising than we have been led to believe. According to a report put out by the Republicans on the Senate Budget Committee, an all-time record one out of every eight men in their prime working years are not in the labor force…

“There are currently 61.1 million American men in their prime working years, age 25–54. A staggering 1 in 8 such men are not in the labor force at all, meaning they are neither working nor looking for work. This is an all-time high dating back to when records were first kept in 1955. An additional 2.9 million men are in the labor force but not employed (i.e., they would work if they could find a job). A total of 10.2 million individuals in this cohort, therefore, are not holding jobs in the U.S. economy today. There are also nearly 3 million more men in this age group not working today than there were before the recession began.”Never before has such a high percentage of men in their prime years been so idle.

But since they are not counted as part of “the labor force”, the government bureaucrats can keep the “unemployment rate” looking nice and pretty.

Of course if we were actually using honest numbers, the unemployment rate would be in the double digits, our economy would be considered to have been in a recession since about 2005, and everyone would be crying out for an end to “the depression”.

And now we are rapidly approaching another downturn. In my recent articles entitled “Has The Next Recession Already Begun For America’s Middle Class?” and “27 Huge Red Flags For The U.S. Economy“, I detailed much of the evidence for why this is true.

And those that run the Federal Reserve know all of this.

That is one of the reasons for all of the “quantitative easing” that they have been doing. The folks at the Fed know that the U.S. economy would probably drift into a deflationary depression if they just sat back and did nothing. So they flooded the system with money in a desperate attempt to revive economic activity. But instead, most of the new money just ended up in the pockets of the very wealthy and further increased the divide between those at the top and those at the bottom in this country.

And now Fed officials are slowly scaling back quantitative easing because they apparently believe that the economy is getting “back to normal”.

We shall see.

Many are not quite so optimistic.

For example, the chief market analyst at the Lindsey Group, Peter Boockvar, believes that the S&P 500 could plummet 15 to 20 percent when quantitative easing finally ends.

Others believe that it will be much worse than that.

Since 2008, the size of the Fed balance sheet has grown from less than a trillion dollars to more than four trillion dollars. This unprecedented intervention was able to successfully delay the coming deflationary depression, but it has also made our long-term problems far worse.

So when the inevitable crash does arrive, it will be much, much worse than it could have been.

Sadly, most Americans do not understand these things. Most Americans simply trust that our “leaders” know what they are doing. And so in the end, most Americans will be completely blindsided by what is coming.

Logged

"You have enemies? Good. That means that you have stood up for something, sometime in your life." - Winston Churchill.

This article was written by Michael Snyder and originally published at The Economic Collapse

When an economy is healthy, there is lots of buying and selling and money tends to move around quite rapidly. Unfortunately, the U.S. economy is the exact opposite of that right now. In fact, as I will document below, the velocity of M2 has fallen to an all-time record low. This is a very powerful indicator that we have entered a deflationary era, and the Federal Reserve has been attempting to combat this by absolutely flooding the financial system with more money. This has created some absolutely massive financial bubbles, but it has not fixed what is fundamentally wrong with our economy. On a very basic level, the amount of economic activity that we are witnessing is not anywhere near where it should be and the flow of money through our economy is very stagnant. They can try to mask our problems with happy talk for as long as they want, but in the end it will be clearly evident that none of the long-term trends that are destroying our economy have been addressed.

Discussions about the money supply can get very complicated, and that can cause people to tune out, but it doesn’t have to be that way.

To put it very basically, when there is lots of economic activity, there is lots of money changing hands.

When there is not very much economic activity, the pace at which money circulates through our system slows down.

That is why what is happening in the U.S. right now is so troubling.

First, let’s look at M1, which is a fairly narrow definition of the money supply. The following is how Investopedia defines M1…

A measure of the money supply that includes all physical money, such as coins and currency, as well as demand deposits, checking accounts and Negotiable Order of Withdrawal (NOW) accounts. M1 measures the most liquid components of the money supply, as it contains cash and assets that can quickly be converted to currency. It does not contain “near money” or “near, near money” as M2 and M3 do.As you can see from the chart posted below, the velocity of M1 normally declines during a recession. Just look at the shaded areas in the chart. But a funny thing has happened since the end of the last recession. The velocity of M1 has just kept falling and it is now at a nearly 20 year low…

Velocity Of Money M1

Next, let’s take a look at M2. It includes more things in the money supply. The following is how Investopedia defines M2…

A measure of money supply that includes cash and checking deposits (M1) as well as near money. “Near money” in M2 includes savings deposits, money market mutual funds and other time deposits, which are less liquid and not as suitable as exchange mediums but can be quickly converted into cash or checking deposits.In the chart posted below, we can once again see that the velocity of M2 normally slows down during a recession. And we can also see that the velocity of M2 has continued to slow down in the “post-recession era” and has now dropped to the lowest level ever recorded…

Velocity Of Money M2

This is a highly deflationary chart.

It clearly indicates that economic activity in the U.S. has been steadily slowing down.

And if we are honest, we have to admit that we are seeing signs of this all around us. Major retailers are closing down stores at the fastest pace since the collapse of Lehman Brothers, consumer confidence is down, trading revenues at the big Wall Street banks are way down, and the steady decline in home sales is more than just a little bit alarming.

In addition, the employment situation in this country is much less promising than we have been led to believe. According to a report put out by the Republicans on the Senate Budget Committee, an all-time record one out of every eight men in their prime working years are not in the labor force…

“There are currently 61.1 million American men in their prime working years, age 25–54. A staggering 1 in 8 such men are not in the labor force at all, meaning they are neither working nor looking for work. This is an all-time high dating back to when records were first kept in 1955. An additional 2.9 million men are in the labor force but not employed (i.e., they would work if they could find a job). A total of 10.2 million individuals in this cohort, therefore, are not holding jobs in the U.S. economy today. There are also nearly 3 million more men in this age group not working today than there were before the recession began.”Never before has such a high percentage of men in their prime years been so idle.

But since they are not counted as part of “the labor force”, the government bureaucrats can keep the “unemployment rate” looking nice and pretty.

Of course if we were actually using honest numbers, the unemployment rate would be in the double digits, our economy would be considered to have been in a recession since about 2005, and everyone would be crying out for an end to “the depression”.

And now we are rapidly approaching another downturn. In my recent articles entitled “Has The Next Recession Already Begun For America’s Middle Class?” and “27 Huge Red Flags For The U.S. Economy“, I detailed much of the evidence for why this is true.

And those that run the Federal Reserve know all of this.

That is one of the reasons for all of the “quantitative easing” that they have been doing. The folks at the Fed know that the U.S. economy would probably drift into a deflationary depression if they just sat back and did nothing. So they flooded the system with money in a desperate attempt to revive economic activity. But instead, most of the new money just ended up in the pockets of the very wealthy and further increased the divide between those at the top and those at the bottom in this country.

And now Fed officials are slowly scaling back quantitative easing because they apparently believe that the economy is getting “back to normal”.

We shall see.

Many are not quite so optimistic.

For example, the chief market analyst at the Lindsey Group, Peter Boockvar, believes that the S&P 500 could plummet 15 to 20 percent when quantitative easing finally ends.

Others believe that it will be much worse than that.

Since 2008, the size of the Fed balance sheet has grown from less than a trillion dollars to more than four trillion dollars. This unprecedented intervention was able to successfully delay the coming deflationary depression, but it has also made our long-term problems far worse.

So when the inevitable crash does arrive, it will be much, much worse than it could have been.

Sadly, most Americans do not understand these things. Most Americans simply trust that our “leaders” know what they are doing. And so in the end, most Americans will be completely blindsided by what is coming.

Logged

"You have enemies? Good. That means that you have stood up for something, sometime in your life." - Winston Churchill.

This article was written by Michael Snyder and originally published at The Economic Collapse

When an economy is healthy, there is lots of buying and selling and money tends to move around quite rapidly. Unfortunately, the U.S. economy is the exact opposite of that right now. In fact, as I will document below, the velocity of M2 has fallen to an all-time record low. This is a very powerful indicator that we have entered a deflationary era, and the Federal Reserve has been attempting to combat this by absolutely flooding the financial system with more money. This has created some absolutely massive financial bubbles, but it has not fixed what is fundamentally wrong with our economy. On a very basic level, the amount of economic activity that we are witnessing is not anywhere near where it should be and the flow of money through our economy is very stagnant. They can try to mask our problems with happy talk for as long as they want, but in the end it will be clearly evident that none of the long-term trends that are destroying our economy have been addressed.

Discussions about the money supply can get very complicated, and that can cause people to tune out, but it doesn’t have to be that way.

To put it very basically, when there is lots of economic activity, there is lots of money changing hands.

When there is not very much economic activity, the pace at which money circulates through our system slows down.

That is why what is happening in the U.S. right now is so troubling.

First, let’s look at M1, which is a fairly narrow definition of the money supply. The following is how Investopedia defines M1…

A measure of the money supply that includes all physical money, such as coins and currency, as well as demand deposits, checking accounts and Negotiable Order of Withdrawal (NOW) accounts. M1 measures the most liquid components of the money supply, as it contains cash and assets that can quickly be converted to currency. It does not contain “near money” or “near, near money” as M2 and M3 do.As you can see from the chart posted below, the velocity of M1 normally declines during a recession. Just look at the shaded areas in the chart. But a funny thing has happened since the end of the last recession. The velocity of M1 has just kept falling and it is now at a nearly 20 year low…

Velocity Of Money M1

Next, let’s take a look at M2. It includes more things in the money supply. The following is how Investopedia defines M2…

A measure of money supply that includes cash and checking deposits (M1) as well as near money. “Near money” in M2 includes savings deposits, money market mutual funds and other time deposits, which are less liquid and not as suitable as exchange mediums but can be quickly converted into cash or checking deposits.In the chart posted below, we can once again see that the velocity of M2 normally slows down during a recession. And we can also see that the velocity of M2 has continued to slow down in the “post-recession era” and has now dropped to the lowest level ever recorded…

Velocity Of Money M2

This is a highly deflationary chart.

It clearly indicates that economic activity in the U.S. has been steadily slowing down.

And if we are honest, we have to admit that we are seeing signs of this all around us. Major retailers are closing down stores at the fastest pace since the collapse of Lehman Brothers, consumer confidence is down, trading revenues at the big Wall Street banks are way down, and the steady decline in home sales is more than just a little bit alarming.

In addition, the employment situation in this country is much less promising than we have been led to believe. According to a report put out by the Republicans on the Senate Budget Committee, an all-time record one out of every eight men in their prime working years are not in the labor force…

“There are currently 61.1 million American men in their prime working years, age 25–54. A staggering 1 in 8 such men are not in the labor force at all, meaning they are neither working nor looking for work. This is an all-time high dating back to when records were first kept in 1955. An additional 2.9 million men are in the labor force but not employed (i.e., they would work if they could find a job). A total of 10.2 million individuals in this cohort, therefore, are not holding jobs in the U.S. economy today. There are also nearly 3 million more men in this age group not working today than there were before the recession began.”Never before has such a high percentage of men in their prime years been so idle.

But since they are not counted as part of “the labor force”, the government bureaucrats can keep the “unemployment rate” looking nice and pretty.

Of course if we were actually using honest numbers, the unemployment rate would be in the double digits, our economy would be considered to have been in a recession since about 2005, and everyone would be crying out for an end to “the depression”.

And now we are rapidly approaching another downturn. In my recent articles entitled “Has The Next Recession Already Begun For America’s Middle Class?” and “27 Huge Red Flags For The U.S. Economy“, I detailed much of the evidence for why this is true.

And those that run the Federal Reserve know all of this.

That is one of the reasons for all of the “quantitative easing” that they have been doing. The folks at the Fed know that the U.S. economy would probably drift into a deflationary depression if they just sat back and did nothing. So they flooded the system with money in a desperate attempt to revive economic activity. But instead, most of the new money just ended up in the pockets of the very wealthy and further increased the divide between those at the top and those at the bottom in this country.

And now Fed officials are slowly scaling back quantitative easing because they apparently believe that the economy is getting “back to normal”.

We shall see.

Many are not quite so optimistic.

For example, the chief market analyst at the Lindsey Group, Peter Boockvar, believes that the S&P 500 could plummet 15 to 20 percent when quantitative easing finally ends.

Others believe that it will be much worse than that.

Since 2008, the size of the Fed balance sheet has grown from less than a trillion dollars to more than four trillion dollars. This unprecedented intervention was able to successfully delay the coming deflationary depression, but it has also made our long-term problems far worse.

So when the inevitable crash does arrive, it will be much, much worse than it could have been.

Sadly, most Americans do not understand these things. Most Americans simply trust that our “leaders” know what they are doing. And so in the end, most Americans will be completely blindsided by what is coming.

Logged

"You have enemies? Good. That means that you have stood up for something, sometime in your life." - Winston Churchill.

3) Total output Q is extremely flat with real growth almost exactly at zero.

4) Therefore MV Money Supply M times Velocity V has also been constant, while the money supply M has been exploding by something like 3/4 Trillion dollars per year. Pathetically low Velocity is the only explanation for what we are seeing.

Obamanomics has brought us the worst, standstill economic velocity in our lifetime. And it won't get better, Brian Wesbury, until we undo some of the destructive policies that are the cause.

Another monetary point: our monetary policy is not just enabling, but CAUSING our deficit spending. While everyone else argues that fiscal policy causes the need for monetary expansion. I believe that if not for irresponsible accommodation by the Fed, we would not be spending anywhere near this far beyond our means. Not in the later Bush years and not in the Obama Presidency. If the US government had to borrow money at market interest rates through bond sales (borrowing) in advance of every dollar of deficit spending, the reckless spending would have been corrected in the political process - long ago, IMHO.